Bitcoin: The Inflation-proof E-Currency of the Future, or Not

If I were to design a new currency I would design something very much like BitCoin. It is a digital currency with about 6.5 million units in circulation. BitCoin will never have more than 21 million units of currency in circulation…. ever. Bitcoin is divisible into tiny fractions of a unit down to millionths of a BitCoin and smaller.

BitCoin is digital money. Imagine PayPal but without the hassle, or the commissions. Image digital gold. Gold which is mined (by computers), but has a known maximum supply of 21 Million ounces.

Gold’s value is largely related to its relative rareness. Gold’s usefulness is pretty limited except as jewelry and a form of currency. Industrial uses of gold consume only a small fraction of gold’s supply. And gold can be mined faster than it is consumed.

Gold cannot be as easily traded or exchanged as BitCoins. Yes gold ETFs can be exchanged for cash which in turn can be used for web transactions, but this is a multi-step process. BitCoins, however, can be easily exchanged from person-to-person or person-to-business with ease.

Today each BitCoin is worth more than $13. BitCoin valuations have fluctuated rapidly. One person, according to Forbes, turned $20,000 into $3 million by buying Bitcoins early then selling them for a killing.

BitCoins may one day be worthless relics on discarded hard drives. Or BitCoins may become the E-commerce alternative replacing PayPal. Right now BitCoins seem to be priced about what the current mining cost will bear. The cost of mining is measured in 1) electricity (energy) and 2) depreciation of the graphics cards used to mine new BitCoins. This tends to put a short-term ceiling on BitCoin prices. However, the BitCoin system makes the cost of BitCoin mining escalate geometrically. Eventually, if all goes optimally, the mining cost will be come prohibitively expensive.

If BitCoins gain wider and wider acceptance I anticipate they will hold or increase in value. However if either of the following happen they will end up virtually worthless: 1) BitCoins simply don’t gain wide acceptance, and lose acceptance over time. 2) The algorithmic infrastructure underlying BitCoin is found to be flawed. There is yet another alternative: That a BitCoin-like system is created the competes with the original BitCoin. Finally one more possibility: various governments outlaw BitCoins.

In closing, BitCoin is a brilliant idea and a risky “investment”. It is riskier than gold, silver, or index ETFs. It is similar in risk to buying options, because the value can rapidly go to zero. However, it is an interesting speculative play that is potentially inflation-proof. Inflation-proof because, unlike government currencies, the printing presses (BitCoin mines), are held in check. Buying 1500 dollars worth of BitCoins is no sillier to me than buying a $1500 gold coin. Just make sure you guard your BitCoins like you would your expensive gold coin… security, security, security. Because BitCoins can be stolen, just like gold. And they can be stolen without the thief even setting foot in your house.

4 thoughts on “Bitcoin: The Inflation-proof E-Currency of the Future, or Not”

I believe that bitcoins are going to change the world. I recommend that everyone read up about them. If you are interested in buying/selling bitcoins, I personally use and recommend http://www.tradehill.com – they have lower fees than the main exchange (mtgox), and their website seems more professional IMHO.

Also, I have a code that will get you 10% off trading fees there for life: TH-R1168